Thursday, February 9, 2012

I've spoken several times on preparing for the coming economic collapse. A few people have taken me seriously and are making preparations. Most simply live as though life will go on as it always has. Porter Stansberry has done a good job of succinctly summarizing why an economic collapse in the United States is imminent and inevitable. When I say "imminent," history shows that when a Republic (like Germany) prints money to pay off its own debts, the natural result of inflation does have some lag time. Our government just borrowed another trillion dollars in the end of January. The debt ceiling went up without even a notice in the evening news. We now owe over $16 trillion (not $15 trillion as in the quote that follows). And in March we will borrow again to pay $1.7 trillion in short term T-bills that are coming due. Inflation is happening, but we are in the "lag time." In Germany it took 18-22 months after serious government printing before normal inflation turned into hyperinflation. So it is inevitable, but you still have time to prepare. You still have time to buy precious metals, invest in contrarian stocks, store food, and teach your family that loving one another is more important than material possessions. So what will you do. Porter Stansberry gives permission to pass on these comments, and I'm happy to do so. (He is a competent analyst and always worth reading.)

What
follows is a review of what I think are the most critical facts in our
country's looming currency crisis. Most people still don't understand
the risks we face as a nation because of our feckless leaders and their
reckless ignorance of basic economics.

What
follows are facts. Nothing in this essay will be conjecture or opinion.
I will make no forecast – at least not in this essay. So please, stop
the political name-calling... and grow up. The problems we face are
ours. All of ours. It doesn't matter how we got here. It only matters
that we begin to deal with these issues – soon. If we don't begin to solve these core financial problems, they will certainly destroy our country.

Today,
our national federal debt far exceeds $15 trillion. This alone is not a
serious problem. The interest we pay on these debts is small – thanks
to the trust of our creditors, who, for the moment, continue to believe
America is a safe bet.

So... what's the problem? The main problem is the amount of debt we owe continues to increase at a faster and faster pace. This
is exceptionally dangerous for two simple reasons. First, there's
simple math. When numbers compound, the result is geometric expansion.
And that's happening right now with our national debt because we
continue to borrow money to pay the interest. And we have done so for
about 40 years. Think about it this way: How big would your debts be
today if you'd been using credit cards to pay your mortgage for the last
several decades?

Even
worse, our debts are compounding at an accelerating pace because we
lack the political ability to limit the federal government's spending.
Please understand... I'm not pointing the finger at any politician or
either political party. I'm simply pointing out a fact: This year's $3.6
trillion federal budget is 20% larger than the entire 2008 budget. And
while our government has grown at a record pace, our economy hasn't. It
has hardly grown at all. Thus, this will be the fourth year in a row we
set a record for deficit spending. Never before in peacetime has our government borrowed this much money. And now, it's borrowing record amounts every year.

This
combination of borrowing record amounts of money (during peacetime) and
continuing to borrow the money we need to pay the interest is setting
the stage for amassive increase in total federal debt levels. Why is this happening? Don't our leaders realize they can't continue on this path?

Well... the problem isn't so simple to fix. What we face isn't a $15 trillion problem. It's actually much, much bigger...

The
$15.3 trillion we owe today is really only a minor down payment on
promises the federal government made to its most important creditors –
the American people. Not yet included in our debt totals are the $15
trillion shortfall in Social Security (thanks to the Democrats), the $20
trillion unfunded prescription drug benefit (thanks to the
Republicans), or the $115 trillion unfunded Medicare liability (thanks
to the Democrats and Republicans).

Most
people ignore these looming liabilities because they obviously will
never be paid. In fact, the federal government's total obligations today
– including all future obligations – is more than $1 million per
taxpayer. And that's if you assume all 112 million taxpayers really
count. (They don't. Only about 50 million people in the U.S. pay any
substantial amount of federal income taxes.)

But
here's the funny part... While everyone seems ready to ignore these
obligations, we've already begun to pay them. Our spending on Medicare
and Social Security already greatly exceeds the $800 billion in payroll
taxes we're collecting to pay these benefits. (Total spending on Social
Security and Medicare last year was more than $1.5 trillion.) And that
means our actual debts will continue to compound faster and faster every
year, assuming nothing is done to curtail these benefits.

I
want to make sure you understand this fact: It doesn't matter how much
(or how little) Congress chooses to cut its discretionary budget. The
promises we've already made to Americans in the form of Social Security
and Medicare guarantee that our debts will continue to compound faster
and faster, every year. How do I know?

Once
again... let's return to basic math. Right now, we're spending (at the
federal level) $2.4 trillion per year on transfer payments and interest
on our national debt. That doesn't include any of the other functions of
the government – nothing else. Meanwhile, we are only collecting $2.3
trillion a year in income, payroll, and corporate taxes.

Let me make sure you understand this: Even if we cut every other government program – including the entire military budget – the federal revenue collected still wouldn't be enough to merely cover the costs of our direct transfer payments. Not even close. And every year, these payments will automatically grow.

Here's
another way to look at the same basic numbers, but on a macro scale.
Right now, total government spending in the U.S. equals $7 trillion per
year. (That's federal, state, and local.) Total interest paid in the
U.S. economy on all debts, public and private, equals $3.7 trillion. The
size of our total economy is only $15 trillion. Thus, we are currently
spending $10 trillion (out of $15 trillion) on our government and debt.
This is unprecedented in all of American history. This financial
structure is unsustainable – and extremely unstable, given our debt
levels.

There's
the bigger problem (yes, it gets worse). The political solution to our
soaring deficits will most likely be higher taxes. Yes, technically
that's a prediction... And I promised no predictions in this piece. But
let's face it. You will never see the federal government make dramatic,
meaningful cuts to its promised benefits – not when half the country
pays no federal taxes and more than 40 million people are on food
stamps. So it's not really a prediction – it's a political reality. Will
higher taxes save us?

No.
You cannot squeeze blood from a stone. The federal debt isn't the
largest obligation we suffer under. Americans hold nearly $1 trillion in
credit card debt. We hold nearly $1 trillion in student loans. Total
personal debt in America is larger ($15.9 trillion) than all of the
federal debt. In total – adding up all of our debts, public and private –
Americans owe close to $700,000 per family. It is not possible to
finance our federal government's spending via taxes because the American people are broke. Total debt levels in America are the highest – by far – of any developed nation.

Tax
the rich, you say. Well, of course. But marginal rates in many places
are already greater than 50%. Tax rates this high don't work… They
actually reduce tax revenues as people move their economic activities
elsewhere to avoid taxes… or even simply forgo working.

Don't forget, the very wealthy can simply leave. James Cameron – director of blockbuster movies Titanic and Avatar – recently did just that, buying a 2,500-acre farm in Canada. John Malone, chairman of Liberty Media, likewise told the Wall Street Journal that
he bought a farm on the Canadian border specifically so that he could
leave the country whenever he wanted. "We own 18 miles on the border, so
we can cross. Anytime we want to, we can get away."

Think
I'm exaggerating the risks of real capital flight from the U.S.?
Well... let's look at the facts. According to the latest IRS report, the
number of Americans renouncing their U.S. citizenship has increased ninefold since 2008.

How
then will the government's spending be financed? Well, I promised no
predictions. Not today. But I will remind you that since 2008, the
Federal Reserve has expanded the monetary base from roughly $800 billion
to nearly $3 trillion. That, again, is a fact. Feel free to draw your
own conclusions about what the Federal Reserve is likely to do in the
future if the U.S. Treasury is faced with a financial need that can't be
met.

You may do whatever you'd like with today's Digest. Feel
free to pass it around to your friends – or anyone else who may be
interested in these ideas. Be prepared for lots of nonsense about making
the rich pay their "fair share" and pie-in-the-sky projections about
how the entitlement system could easily be reformed.